NALGONDA REALTORS PRIVATE LIMITED,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX , CENTRAL CIRCLE-2(3), HYDERABAD

First, we will deal with assessee’s appeal in ITA No.655/Hyd/ 2020 for A.Y. 2012-13.

The brief facts of the case are that the assessee is engaged in the business of real estate development and part of Kapil Group of companies filed its return of income for AY 2012-13 on 26.09.2012 admitting total income of Rs.9,98,338/-. A search and seizure operation under Section 132 of the Income Tax Act, 1961 was conducted on 07-04-2017 on the group of Kapil Consultancy Services Pvt. Ltd and in which, the assessee was also covered. The assessment has been, subsequently re-opened under Section 147 of the Income Tax Act, 1961 for the reasons recorded, as per which 2

The assessee carried the matter in appeal before the ld.CIT(A). The ld.CIT(A), for the reasons stated in their order dated 18-09- 2020, partly allowed the appeal filed by the assessee, where he had confirmed the addition made towards disallowance of finance cost to an extent of 11,35,210/- and however, deleted the addition made u/s 14A of the Act.

The assessee preferred a further appeal before the Tribunal. The ITAT, Hyderabad Bench vide its common order in ITA No.655/Hyd/2020 dated 21-03-2022, set aside the issue to the file of the AO for fresh examination. The assessee filed an appeal before the Hon'ble High Court of Telangana, and the Hon'ble High Court of Telangana, in its common order dated 02-02-2023, set aside the common order passed by the Tribunal dated 21-03-2022 and directed the Tribunal to dispose of the appeal on the limited grounds urged by the appellant, namely, disallowance of interest expenditure under Section 36(1)(iii) of the Act to the extent disallowed by the first appellate authority as well as the validity of the reassessment proceedings.

The first issue that came up for our consideration from the assessee's appeal is the validity of re-opening of assessment under Section 147 of the Act.

The learned counsel for the assessee, Shri S. Rama Rao, submitted that the assessment in the impugned assessment year was re-opened after 4 years from the end of the relevant assessment year, without there being any fresh material with the AO to allege that there is an escapement of income on account of failure on the assessee to fully and truly disclose all material facts necessary for the assessment. The learned counsel for the assessee further submitted that the AO re-opened the assessment on the basis of reasons recorded, which are reproduced in the assessment order itself. The AO copied the reasons recorded in the case of M/s. Indur Developers and Agencies Pvt. Ltd., for the assessment year 2016-17 and made a sweeping observation that the Kapil group of companies were resorting to uniform practice for sale of flats from the buyers and diverting funds for non-business purpose to advance loans to other group companies, without being there any specific observation with regard to the appellant and escapement of income for that assessment year. Therefore, he submitted that the re-opening of assessment is invalid and needs to be quashed.

The ld.DR, Ms. Reema Yadav, on the other hand, supporting the order of the ld.CIT(A) submitted that the assessment has been reopened on the basis of fresh tangible material which came to the possession of the Assessing Officer, during the search proceedings, in the cases of the Kapil Group of Companies, where the modus operandi of the assessee was unearthed, which reveals that the 4

We have heard both parties, perused the material on record, and gone through the orders of the authorities below. We have also carefully considered the reasons recorded by the AO for re-opening of the assessment. The sole basis for the AO to form a reasonable belief of escapement of income is on the basis of search conducted in the Kapil Group of Companies on 07-04-2017. The AO, based on the assessment of M/s. Indur Developers and Agencies Pvt. Ltd for A.Y. 2016-17, observed that the assessee has been showing the finance cost under the land development cost which has actually been spent for the development of land. Based on such opinion, Assessing Officer has formed a reasonable belief of escapement of income that interest paid by the appellant on loan advances received from customers towards the sale of flats is not incurred wholly and exclusively for the purpose of the business of the assessee. Therefore, Assessing Officer opined that there is a reason to believe that the income chargeable to tax has escaped the assessment.

We have given our thoughtful consideration to the reasons recorded by the AO to reopen the assessment under Section 147 of the Act, and we ourselves do not subscribe to the reasons given by the AO for the simple reason that, there is no live nexus between the reasonable belief of escapement of income on the basis of fresh material which came to the possession of the Assessing Officer 5

In the present case, the original assessment has been completed u/s 143(3) of the Income Tax Act, 1961 and the assessment has been reopened u/s 147 of the Act beyond 4 years from the end of relevant assessment year. Once the assessment has been reopened after 4 years, then proviso to Section 147(1) of the Act comes into operation and as per said provision, the assessment cannot be reopened unless there is a finding from the Assessing Officer on failure of the assessee to disclose fully and truly all material facts necessary for his assessment. In the present case, going by reasons recorded by the Assessing Officer, we find that the Assessing Officer has recorded reasons on the basis of assessment proceedings of M/s. Indur Developers Pvt. Ltd for the A.Y. 2016-17 and made a sweeping statement that all the Kapil Group of companies are indulging in practice of collecting advances from customers and diverting interest bearing funds for non-business purposes being investments with group companies in the form of share capital and loans and advances. Further, the Assessing Officer considered the loans and advances received from the customers from the notes to accounts filed by the assessee along with regular return of income to support his reasons. From the above, it is undoubtedly clear that the Assessing Officer has failed to make out a case on the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. 7

Therefore, in our considered opinion, reopening of the assessment under Section 147 of the Act on the basis of the reasons recorded by the Assessing Officer, which is available in the assessment order, is a clear case of non-application of mind by the Assessing Officer, before initiating the proceedings under Section 147 of the Act. Therefore, we are of the considered view that the reopening of the assessment consequent assessment order passed by the AO under Section 143(3) r.w.s. 147 of the Act dated 28-12- 2019 is invalid and liable to be quashed. Thus, we quash the assessment order passed by the AO.

The second issue that came up for our consideration from ground nos.3 and 4 of assessee’s appeal is relating to the addition on account of finance cost of Rs.11,35,210/-. Since we have quashed the reassessment order, ground nos.3 and 4 taken by the assessee relating to the issue of addition of finance cost becomes infructuous and thus, the ground of appeal taken by the assessee has been dismissed as infructuous.

In the result, the appeal filed by the assessee is allowed.

The brief facts of the case are that the assessee is engaged in the business of real estate development and part of Kapil Group of business, filed its return of income for AY 2013-14 on 25.09.2013 admitting total income of Rs.37,51,650/-. A search and seizure operation under Section 132 of the Income Tax Act was conducted on 07-04-2017 on the group of Kapil Consultancy Services Ltd and in which the assessee was also covered. The assessment has been subsequently re-opened under Section 147 of the Income Tax Act for the reasons recorded, as per which income chargeable to tax has escaped the assessment. Accordingly, a notice under Section 148 of the Act dated 26-03-2019 was issued. In response to the notice under Section 148 of the Act, the appellant filed a return of income

The assessee carried the matter in appeal before the ld.CIT(A). The ld.CIT(A) for the reasons stated in their order dated 18-09-2020, has confirmed the finance charges to the extent of Rs.41,64,131/- out of Rs.2,42,02,759/- and also confirmed the addition made on account of interest on redeemable debentures.

The assessee preferred a further appeal before the Tribunal. The ITAT, Hyderabad Bench vide its common order in ITA No.655/Hyd/2020 dated 21-03-2022, set aside the issue to the file of the AO for fresh examination. The assessee filed an appeal before the Hon'ble High Court of Telangana, and the Hon'ble High Court of Telangana, in its common order dated 02-02-2023, set aside the common order passed by the Tribunal dated 21-03-2022 and directed the Tribunal to dispose of the appeal on the limited grounds urged by the appellant, namely, disallowance of interest expenditure under Section 36(1)(iii) of the Act to the extent disallowed by the first appellate authority as well as the validity of the reassessment proceedings.

The first issue that came up for our consideration from the assessee's appeal is the validity of re-opening of assessment under Section 147 of the Act.

The learned counsel for the assessee, Shri S. Rama Rao, submitted that the assessment in the impugned assessment year was re-opened after 4 years from the end of the relevant assessment year, without there being any fresh material with the AO to allege that there is an escapement of income on account of failure on the assessee to fully and truly disclose all material facts necessary for the assessment. The learned counsel for the assessee further submitted that the AO re-opened the assessment on the basis of reasons recorded, which are reproduced in the assessment order itself. The AO copied the reasons recorded in the case of M/s. Indur Developers and Agencies Pvt. Ltd., for the assessment year 2016-17 and made a sweeping observation that the Kapil group of companies were resorting to uniform practice for sale of flats from the buyers and diverting funds for non-business purpose to advance loans to other group companies, without being there any specific observation with regard to the appellant and escapement of income for that assessment year. Therefore, he submitted that the re-opening of assessment is invalid and needs to be quashed.

The ld.DR, Ms. Reema Yadav, on the other hand, supporting the order of the ld.CIT(A) submitted that the assessment has been reopened on the basis of fresh tangible material which came to the possession of the Assessing Officer, during the search proceedings, in the cases of the Kapil Group of Companies, where the modus operandi of the assessee was unearthed, which reveals that the 11

We have heard both parties, perused the material on record, and gone through the orders of the authorities below. We have also carefully considered the reasons recorded by the AO for re- opening of the assessment. The sole basis for the AO to form a reasonable belief of escapement of income is on the basis of search conducted in the Kapil Group of Companies on 07-04-2017. The AO, based on the assessment of M/s. Indur Developers and Agencies Pvt. Ltd for A.Y. 2016-17, observed that the assessee has been showing the finance cost under the land development cost which has actually been spent for the development of land. Based on such opinion, Assessing Officer has formed a reasonable belief of escapement of income that interest paid by the appellant on loan advances received from customers towards the sale of flats is not incurred wholly and exclusively for the purpose of the business of the assessee. Therefore, Assessing Officer opined that there is a reason to believe that the income chargeable to tax has escaped the assessment.

We have given our thoughtful consideration to the reasons recorded by the AO to reopen the assessment under Section 147 of the Act, and we ourselves do not subscribe to the reasons given by the AO for the simple reason that, there is no live nexus between the reasonable belief of escapement of income on the basis of fresh 12

In the present case, the original assessment has been completed u/s 143(3) of the Income Tax Act, 1961 and the assessment has been reopened u/s 147 of the Act beyond 4 years from the end of relevant assessment year. Once the assessment has been reopened after 4 years, then proviso to Section 147(1) of the Act comes into operation and as per said provision, the assessment cannot be reopened unless there is a finding from the Assessing Officer on failure of the assessee to disclose fully and truly all material facts necessary for his assessment. In the present case, going by reasons recorded by the Assessing Officer, we find that the Assessing Officer has recorded reasons on the basis of assessment proceedings of M/s. Indur Developers Pvt. Ltd for the A.Y. 2016-17 and made a sweeping statement that all the Kapil Group of companies are indulging in practice of collecting advances from customers and diverting interest bearing funds for non-business purposes being investments with group companies in the form of share capital and loans and advances. Further, the Assessing Officer considered the loans and advances received from the customers from the notes to accounts filed by the assessee along with regular return of income to support his reasons. From the above, it is undoubtedly clear that the Assessing Officer has failed to make out a case on the failure on the part of the assessee to disclose 14

Therefore, in our considered opinion, reopening of the assessment under Section 147 of the Act on the basis of the reasons recorded by the Assessing Officer, which is available in the assessment order, is a clear case of non-application of mind by the Assessing Officer, before initiating the proceedings under Section 147 of the Act. Therefore, we are of the considered view that the reopening of the assessment consequent assessment order passed by the AO under Section 143(3) r.w.s. 147 of the Act dated 28-12- 2019 is invalid and liable to be quashed. Thus, we quash the assessment order passed by the AO.

The other issues that came up for our consideration from ground nos. 4 to 8 of assessee’s appeal are relating to the addition of Rs.41,64,131/- towards finance cost being interest paid on customers advance and addition of Rs.40,17,300/- on account of estimated interest on redeemable debentures. Since we have quashed the reassessment order, ground nos. 4 to 8 taken by the assessee relating to the issues of addition of finance cost and redeemable debentures become infructuous and thus, the grounds of appeal taken by the assessee have been dismissed as infructuous.

In the result, the appeal filed by the assessee is allowed.

The brief facts of the case are that the assessee is engaged in the business of real estate development and part of Kapil Group of business, filed its return of income for AY 2017-18 on 26.10.2017 declaring total income of Rs.37,75,420/-. A search and seizure operation under Section 132 of the Income Tax Act was conducted on 07-04-2017 on the group of Kapil Consultancy Services Ltd and in which the assessee was also covered. The case was selected for scrutiny and the assessment has been completed u/s 143(3) of the Act on 30.12.2019 and admitted total income at Rs.10,12,62,688/- by making addition towards disallowance of finance cost being the interest paid to customers on advance received towards sale of flats / commercial space, disallowance u/s 14A of the Act and addition towards cash deposits during the demonetization period.

The assessee carried the matter in appeal before the ld.CIT(A). The ld.CIT(A) for the reasons stated in their order dated 18-09-2020 partly allowed the appeal filed by the assessee where the ld.CIT(A) sustained additions made towards disallowance of fiancé charges to Rs.76,24,876/- out of total addition made by the Assessing Officer for Rs.9,30,91,117/- and deleted the addition towards disallowance u/s 14A of the Act but confirmed addition towards cash deposits during the demonetization period.

The assessee preferred a further appeal before the Tribunal. The ITAT, Hyderabad Bench vide its common order in ITA No.657/Hyd/2020 dated 21-03-2022, set aside the issue to the file of the AO for fresh examination. The assessee filed an appeal before the Hon'ble High Court of Telangana, and the Hon'ble High Court of Telangana, in its common order dated 02-02-2023, set aside the common order passed by the Tribunal dated 21-03-2022 and directed the Tribunal to dispose of the appeal on the limited grounds urged by the appellant, namely, disallowance of interest expenditure under Section 36(1)(iii) of the Act to the extent disallowed by the first appellate authority as well as the validity of the reassessment proceedings.

The first issue that came up for our consideration from ground nos.2 to 4 of assessee's appeal is the disallowance of finance charges being interest paid to customers on advance towards sale of residential flats / commercial space and sustained addition by the ld.CIT(A) for Rs.76,24,876/-.

During the course of the assessment proceedings, the AO noticed that the real estate companies of Kapil Group have been accepting advance for sales of residential / commercial office space by entering into an MOU with potential customers. As per the MOU, the potential customer has to pay 80% of the sale consideration and choose an advance PUT option for redeeming the advance given. Depending upon the period of advance PUT option, interest will be paid ranging from 10% to 14%. The potential customer can get the office space or flat registered by paying the balance 20% of the consideration before the advance PUT option period ended. If the potential customer withdraws the advance amount earlier to advance PUT option, he will be given much lesser interest than the promised interest. The AO observed that as per Schedule 17 annexed to the Profit and Loss Account filed by the assessee, an amount of Rs.9,30,91,117/- has been claimed as interest charges under the head Revenue Expenses and added to work-in-progress. The AO called upon the assessee to file necessary evidence and also justification for the interest debited under the head Revenue Expenses added to work-in-progress. In response, the assessee submitted that it has paid interest amounting to Rs.9,30,91,117/- to customers on advance paid by them in light of MOUs and as the same was incidental to the business, it has debited to the Profit and Loss Account. However, the said amount was taken to the balance sheet under the head work-in-progress for claiming the same proportionately against the revenue from sale of flats in the future. The assessee further submitted that since the customer has paid an advance amount of about 80% of the sale value, as per the agreement with the customers, the appellant has paid interest ranging from 10% to 14% for a period of 1 year to 4 years. Therefore, 18

The AO, however, was not convinced with the explanation furnished by the assessee. According to the AO, although the assessee has furnished general reply regarding the purpose of the funds received as an advance for the purchase of office space, but failed to explain the utility of the advances for the purpose of the business of the assessee. The AO further observed that the appellant has diverted advances received from customers to various other group companies. Therefore, the AO opined that the interest paid cannot be justified just because TDS has been deducted on the said interest. Accordingly, the AO disallowed the interest debited under finance charges and carried forward to work-in-progress amounting to Rs.9,30,91,117/- under Section 36(1)(iii) of the Income Tax Act, 1961.

The assessee carried the matter in appeal before the ld. CIT(A). Before the ld. CIT(A), the assessee submitted that the interest paid on customers' advance is wholly and exclusively incurred for the purpose of business and further, the assessee has paid interest on customers' advance, as per the terms of MOU with customers. The ld. CIT(A), after considering the relevant submissions of the assessee and also taken note of the fact that the assessee has made investments in various group companies, amounting to Rs. 8,72,15,100/- whereas own funds being shareholder funds and long-term borrowings is not sufficient to cover investments and 19

The learned counsel for the assessee, Shri S. Rama Rao, submitted that the ld. CIT(A) is erred in sustaining the addition made by the AO towards disallowance of finance charges on altogether a different ground, even though, the AO disallowed interest on the ground that the appellant has not established utilization of advances from customers for the purpose of business of the assessee. The learned counsel for the assessee further submitted that the assessee is into the business of real estate development, collects advances from customers for sale of residential flats and commercial space. The customers pay 80% of consideration in advance in terms of MOU. The MOU provides for payment of interest @ of 10% to 14% in case of delay in delivery of flats. As per the agreement between customers, the appellant has paid interest on customers' advance and the same has been debited under the head finance charges. The ld.CIT(A) without appreciating the relevant facts, confirmed the addition to an extent of Rs.76,24,876/- out of the total disallowance of Rs.9,30,91,117/- and the order should be set aside.

The ld.DR Ms. Reema Yadav, on the other hand, supporting the order of ld. CIT(A), submitted that the assessee has received advance from customers and also diverted funds to various group companies in the form of share capital and loans and advances. The assessee has not filed any evidence to prove utilization of advances received from the customers for the purpose of business of the assessee. Therefore, the AO has rightly disallowed interest expenses and therefore, their order should be upheld.

We have heard the rival contentions, perused the material on record and gone through the orders of the authorities below. The fact borne out from the record indicates that the assessee being in the business of real estate development, has collected advances from customers for sale of flats / commercial complexes in terms of MOU. As per the terms of MOU between the appellant and the customers, there is a provision for payment of interest ranging from 10% to 14% in case of any delay in delivery of flats to the customers. As per the contractual agreement with the customers in terms of MOU, the assessee has paid interest on customers' advances and debited under the head finance charges. The AO has disallowed interest expenses on the ground that the appellant failed to prove utilization of advances received from customers for the purpose of business. The ld. CIT(A) went on a different footing and computed disallowance of interest for diversion of interest-bearing funds for non-business purpose. We find that the basic business of the assessee is real estate development, and in that process, the assessee collected advances from customers for sale of flats. As per the agreement with the customers, the assessee has paid interest in

The next issue that came up for our consideration from ground no.5 and 6 of assessee's appeal is the addition towards cash deposits during demonetization period for Rs.35,24,000/- u/s 69A of the Act.

During the course of assessment proceedings, it was observed that the assessee has deposited an amount of Rs.35,24,100 during the demonetization period. The AO called upon the assessee to explain the source for cash deposits during the demonetization period. The assessee, by letter dated 10-11-2019, was asked to furnish the details of account-wise cash deposited and also a certificate from the bank with regard to the cash deposited in SBNs during the demonetization period. Since the assessee did not furnish any details with regard to the cash deposits in SBNs, the AO made an addition of Rs.35,24,000/- under Section 69A of the Act.

On appeal, the ld.CIT(A) confirmed the addition made by the AO.

The learned counsel for the assessee Shri S. Rama Rao, submitted that the appellant had furnished details of the cash received from various persons, which is the source for cash deposits during the demonetization period into the bank account, but the AO and ld.CIT(A) rejected the explanation furnished by the assessee and made an addition towards cash deposits under Section 69A of the Act.

Ms. Reema Yadav, the DR, on the other hand, supporting the order of ld.CIT(A) submitted that the appellant could not file any details and also the exact amount of cash deposited in SBNs, and the assessee also failed to file the relevant source for cash deposits during the demonetization period. After considering the same,

We have gone through the rival contentions of the parties and perused the orders of authorities below. Although the appellant claims to have received advances from various customers for the sale of flats, and the same has been recorded in the books of accounts, the appellant has failed to file any evidence, including the relevant cash books, to prove the amount of cash in its bank account. The appellant made a general statement in light of the cash flow statement for the year ended 31-03-2017 and asserted that the appellant had sufficient cash in its bank account. In our considered opinion, unless the assessee files necessary evidence, it is difficult to accept the explanation of the assessee with regard to the source for cash deposits. Therefore, we reject the explanation furnished by the assessee and sustain the addition made towards cash deposits during the demonetization period.

In the result, the appeal of the assessee is partly allowed.

To sum up, the appeals of assessee in ITA Nos.655 and 656/Hyd/2020 are allowed and the appeal of assessee in ITA No.657/Hyd/2020 is partly allowed.